Mobile users rang up $970 million worth of in-app purchases in 2011, says the research firm IHS. That’s impressive, considering that the firm estimates about 96 percent of all apps downloaded in 2011 were free.

Even so, that’s pocket change compared to predictions for 2015, when IHS expects the annual tally to hit $5.6 billion. But grabbing a piece of that market is just an obvious reason why more developers need to start adding support for in-app purchases to their apps. Another less obvious reason is that the business model of charging up front for the app itself may be less and less viable.

“In 2012, it will become increasingly difficult for app stores and developers to justify charging an upfront fee for their products when faced with competition from a plethora of free content,” IHS said in a January research note. “Instead, the apps industry must fully embrace the freemium model and monetize content through in-app purchases.”

$10K a Day?Some developers are already making a significant amount of money from this model. “All of our games have included in-app purchases,” says Baudouin Corman, Gameloft vice president of publishing for the Americas. “Today, more than 50 percent of our revenue is coming from advertising and in-app purchases. In-app purchases are an extremely powerful monetization model.”

Not surprisingly, the revenue potential varies by the type of app. For example, when an app is highly engaging or plays a major role in users’ lives, those users will be more willing to purchase additional features or content.

“A lot of successful gaming publishers would be making tens of thousands of dollars a day from in-app purchases -- probably even more if it’s Words With Friends or something like that,” says Derek Ting, co-founder of Enflick. “Social games tend to perform well. If there’s not a lot of traffic, then it’s difficult to make money from in-app purchases.”

Some developers caution against restricting an app’s functionality in order to goose in-app purchases. For example, a free game might be fully functional to get users hooked enough that they’re willing to purchase optional weapons or additional levels. That strategy can help build a buzz.

“Players that are not using in-app purchases are still very important because they’re a big community, and all of the games have more and more of a social aspect,” says Corman. “They talk about the game with their friends. When using in-app purchases, it’s key to make sure that these players that might never purchase anything can still enjoy the experience.”

Don’t Overlook OverheadKeep in mind that royalties and support costs will consume part of the revenue. For example, Apple takes a 30 percent cut of in-app sales, and that’s in addition to the 30 percent royalty up front if users have to pay to download the app.

Also, when users pay for something, they expect at least some level of customer service. Depending on how many users an app has, that could mean staffing up. “It’s key to be as informative as possible before the purchase because it means that it will limit the number of questions a support team will have to handle,” says Corman.

The app store’s policies may also affect support costs. “We have support more for technical issues rather than billing issues,” says Ting. “Because Apple manages all of the billing for you, there’s not much you can do from a billing level. It’s very nice. You don’t have to worry about any billing issues or payment gateways and all that. All you have to worry about is supporting the functionality of the product.”

Operators as DistributorsBesides app stores, some mobile operators also do “billing on behalf of,” or BOBO: This allows users to have in-app purchases added to their phone bill instead of paying the developer directly with, say, a credit card. One example is Sprint, which works with BOKU, BilltoMobile and Google to enable BOBO.

“Any developer who leverages Google Play for distribution of the application can leverage the Google Play in-app billing SDK to enable in-app billing, which, for most Sprint subscribers, includes carrier billing,” says Jenny Walsh, a Sprint spokeswoman.

“In addition, Sprint has partnered with BilltoMobile and BOKU to offer a simple, secure payment option that requires no registration, no setup and no association with other financial instruments such as credit or bank cards,” says Walsh. “Purchases are completed using a two-step authentication process, and customers don’t have to expose any sensitive account information while using the service.”

Mobile app makers who are eager to showcase new ideas can take advantage of an expanding outlet for their creativity: developer competitions.

Competitions may take the form of online developer challenges or in-person hackathons that engage individuals or teams in 24-hour (or longer) coding sessions. Events may be sponsored by technology vendors, software companies, industry organizations or even government agencies. For the winners, a competition can offer cash and the opportunity to further refine an app. Other incentives could include free gear, a meeting with a venture capital firm, or even an opportunity to present the app at a conference.

Developers, however, point to other benefits beyond the immediate reward. Chief among those is the chance to gain visibility.

Matt Mattox, vice president, products and marketing, at Axial Exchange, a Raleigh, N.C., health care software company, cites that factor as a major plus of winning the Ensuring Safe Transitions from Hospital to Home Challenge. The challenge was co-sponsored by Health 2.0 and the U.S. Department of Health and Human Services Office of the National Coordinator for Health Information Technology (ONCHIT).

“Market exposure and validation of our mission have both been key benefits of winning the challenge,” says Mattox. “We were announced as winners at a national Medicare conference in Baltimore, where there were dozens of hospital representatives in attendance. That alone supercharged our sales pipeline.”

Axial has received plenty of attention for its transition of care software, which runs on mobile devices and PCs. The award, announced in December 2011, is helping the company land projects. “We’ve engaged with several dozen hospitals since winning the award,” says Mattox. “We expect some of those deals to close this year and go into pilot in late summer or early fall.”

Getting Valuable FeedbackThere are other nonmonetary benefits to entering a challenge, says Jorg Lenz, marketing manager at SOFTPRO GmbH, which specializes in digital signatures. In April, SOFTPRO won the Popular Choice Award in Samsung’s Galaxy Note S Pen App Challenge. The competition sought apps that take advantage of the Galaxy Note’s stylus. SOFTPRO’s winning entry, SignDoc Mobile, captures electronic signatures that the company says permit a reliable authentication of a document’s signer.

The Samsung challenge provided an opportunity to “get into the mindset” of potential customers, says Lenz, as well as take a look at other professional or semiprofessional applications in the same field and test whether the messaging around the app is appropriate. Feedback is another important side benefit, adds Lenz. He says the company has received comments on its app from Samsung challenge voters and via social media among other sources.

Edward Yau, co-founder of Dendro Kids, also points to visibility and feedback as bonuses to challenges. Dendro Kids’ Sage, a public pre-K and elementary school search tool, was awarded best educational application in New York City’s BigApps 3.0 developer challenge.

“The exposure that came with participating in the contest and our strong presence in the public vote made it all worthwhile, no matter the outcome,” says Yau. People who found the app through the context have provided invaluable feedback, he adds. “I have learned quite a bit about the education space and I am super-excited about our new product road map.”

Participants in on-site hackathons have the additional benefit of meeting other coders. For instance, the 30 participants in last year’s Intel AppUp developer hackathon had plenty of time to get acquainted: The event took place over the course of a 36-hour, 800-mile bus trip between San Francisco and Bellevue, Wash. [Disclosure: Intel is the sponsor of this content.] Intel teamed with StartupBus.com to provide the mobile venue. The hackathon was staged in connection with Intel’s Elements conference, the company’s annual meetup for AppUp developers.

“The trip was a fun way for participants to travel to our Elements conference, to bond and network with fellow developers, and to code innovative apps for the Intel AppUp center,” says Gina Marie Bovara, event manager of Intel Services Division. The Intel AppUp center, says Bovara, was looking for an innovative way to enable developers to monetize and sell their apps. The coders on board Intel’s first mobile hackathon generated 11 apps.

Sizing up a ChallengeApp developer challenges differ markedly from one another, both in scope as well as in terms and conditions. Some challenges are fairly open-ended, while others focus on a specific platform. Perhaps more importantly, some challenge sponsors keep the resulting intellectual property (IP), while others let the developer maintain possession.

Rahil Patel, an independent game developer, has been participating in hackathons since moving to San Francisco from New York City. He says the San Francisco events are a departure from the game jams he attended in New York City.

“Hackathons in San Francisco are different,” says Patel. “They’re heavily sponsored, often constraining developers to create something for their own product for marketing purposes. Developers have to be careful. Contests vary in legal terms. Some can be considered as crowdsourcing.”

In May, Patel participated in a Chartboost Hackathon, which let developers build any mobile game using their choice of SDK/API. The upshot: Patel built a prototype game that he says he may further develop. Doodle Tangle, the working name for the prototype, is a multiplayer iPad game in which up to 11 players navigate through mazes.

“I joined the Chartboost Hackathon for the same reasons I join game jams: I’m currently interested in game development, I like meeting other people with similar interests, and designing and creating a small project feeds my creative needs,” he says.

Patel advises newcomers to choose a hackathon based on intrinsic motivation.

“I’d recommend paying close attention to the challenge description and making sure it is in your wheelhouse,” adds Mattox. “This one, Health 2.0/ONCHIT, happened to fit us perfectly. We’ve passed on others that have sounded very interesting but weren’t sufficiently aligned with what we do.”

And Lenz advises challenge neophytes to be motivated by more than money. “If you are in for the money only, you might be on the wrong track,” he says. “It’s nice to win the money, but there is more to benefit from than dollars.”

Maybe you got into app development as a hobby and now you want to turn it into a business. Or maybe creating a moneymaker was the goal all along. Either way, the same question applies: What are people willing to pay for your app?

There are several options for monetizing an app, including in-app advertising, sponsorships and in-app purchases, each of which we’ll cover over the next few months. But for many developers, the most obvious option is simply to charge users to download their apps.

But it’s rarely that simple. One major challenge is deciding how much to charge. In general, the more sophisticated an app is, the more users are willing to pay. That’s why utility apps -- whether they’re for carpentry or IT -- often go for $1.99 or more. An extreme example is BarMax CA: For $999.99, you get a comprehensive California bar exam review course created by Harvard Law School alumni.

The vast majority of premium apps are priced at 99 cents -- minus, of course, the 30 percent or so royalty that app stores charge developers. Multiply that by however many hundreds or thousands of copies you hope to sell, and that price point could be enough to recoup your cost of developing the app and provide a profit margin.

But will 99 cents generate enough revenue to cover your support costs too? After all, when people pay for something, they expect some level of support. The more sophisticated the app, the more calls and emails you’re likely to field, increasing the chances that you might have to hire one or more people to provide support. That overhead has to factor into the price too.

If your app currently is free, and you’re thrilled with its current download stats, don’t assume that they’ll stay the same once you start charging. Expect just the opposite, some veteran developers say.

“If you put a free app out there and you decide to change the price to something like 99 cents, for every hundred that you got when free, you might get one or two at 99 cents -- if you’re lucky,” says Terry Hughes, who developed BlackBerry apps before becoming managing director at AppCarousel, which bought his company.

The Freemium Strategy

One alternative is a freemium business model: Offer a basic version of the app for free and then hope it’s compelling enough that users are willing to shell out a buck or more for a premium version that has more features.

“It was the only way we could monetize the momentem app,” says Hughes. “We get $8 a month from the app because once busy businesspeople are hooked on it, they’re more than happy to pay. To get them hooked in the first place, you have to give it for free, especially these days. There are so many free equivalents for everything that having any price tag is a challenge.”

Success with a freemium model requires walking a fine line. The free version has to have enough features to get users hooked, but not so many that they believe upgrading isn’t worth it. Also, the free version needs some kind of in-app messaging to upsell them on the premium version, but those reminders shouldn’t be so pushy and so frequent that users perceive them as nagging and uninstall the app.

Whatever your strategy, keep in mind that app prices have been flat or declining over the past year. For example, the research firm Distimo found that between March 2011 and February 2012, the average price of iPhone apps declined from $3.69 to $3.26, while apps sold through the Google Play store increased by a penny to $3.14.

Do Sales Goose Sales?

If sales aren’t what you expected, a temporary discount could bring in the volumes necessary to get revenue where it needs to be for that month or that quarter. If some of your revenue comes from in-app advertising, a promotion also could expand your ad revenue.

Not surprisingly, the deeper the discount, the more users take advantage of it. “In general, we noticed that the optimum sales occurred when the price was cut in half or the application was offered in tier 1 ($0.99) or tier 2 ($1.99),” said Distimo in a January 2012 study.

Although a 50 percent price cut might be tough to swallow, the sales bump can be significant -- even when the promotion lasts only a day. “On the first day of the sale, the average revenue increased by 41 percent in the Apple App Store for iPhone,” said Distimo. “Moreover, the revenue during the whole sale (we looked at a maximum of 15 days) was up by 22 percent. The first-day effect is larger in the Apple App Store for iPad (52 percent), and the increase in revenue during the sale in the Google Android Market was the highest at 29 percent on average.”

Even so, discounts don’t guarantee a big revenue boost. Distimo’s study found that 44 percent of iPhone apps lost revenue during their sale, and 23 percent of them took a hit of more than 20 percent. That’s why picking the right discount amount is key.

“For example, offering a discount of $1 on an application that normally costs $7.99 lowers the revenue, whereas offering a discount of $3 on average increased the revenue by 131 percent,” said Distimo. “In general, we noticed that the tipping point happened when the price was cut in half or the application was offered in tier 1 ($0.99) or tier 2 ($1.99). Despite the risk of loss of revenue, putting your app on sale once in a while seems to pay off for the majority of applications and their developers.”